Tuesday, April 04, 2006

OG Econ: All that glitters

As the chart above shows, gold has been in a bull market since about April 2001.

Many argue that gold's role in the world's monetary system has ended, and that it will never again represent the store of value that it once was. John Maynard Keynes , the influential economist, as early as 1924, described the gold standard as a "barbarous relic". Many central banks, especially in Europe seem to agree, and have been selling off their gold reserves at the rate of around 500 tonnes a year. Given that the gold price peaked at around $850/oz t ($27,300,000 per tonne) in 1980, and in real terms is still well below that, gold has proven to be one of the worst investments you could have made 25 years ago. However, since April 2001 the gold price has more than doubled in value against the U.S. Dollar , prompting speculation that this long secular bear market has ended and a bull market has returned

There are many of us who fear the worst -- especially these days, with all signs suggesting that the shit is pretty far along en route to the fan. If you foresee oil shortages, catastrophic climate change, spreading war in the Middle East spurred by the neverending War on Terrorism, the OG mildly suggests that you begin hoarding gold in a safe spot under your house sometime soon. Heck, there are enough signs out there to justify many of us becoming gold bugs:

Recently, gold bugs have pointed to rapidly rising oil prices and the unwillingness of China to significantly de-couple the value of its own currency from the US dollar as complementary rationales for purchasing and holding gold. In this view, the relative value relationships between consumable commodities and variations in industrial capacity between markets increase the likelihood of chaotic behavior in the present international economic system because modern hard currencies (or fiat currency ) lack full backing by gold reserves and therefore cannot establish empirically rigorous values for goods and services.

Investing in this kind of tangible stuff is appealing to me, maybe because I can understand what it is I'm investing in. Of course, the OG never invests in anything because the OG is a fundamentally fearful creature.